Friday’s NFP was released with stock markets finely poised inside the range set on FOMC day, while the USD was trading at lows last traded on the 11th April. Expectations were for some fairly average readings, with average hourly earnings and the unemployment rate estimated to be unchanged, and a headline print of +238K. However, the readings were firmly lower and missed every estimate – the headline figure was only +175K, the unemployment rate rose to 3.9%, while average hourly earnings rose 0.2%.
None of these figures are terrible – in fact, the labour market still looks healthy - but the misses need to be taken in context of Wednesday’s FOMC meeting where the Fed stuck to a dovish tone despite the rise in inflation; they clearly have a bias for easing. This Jobs Report could therefore help them justify cuts. As ING point out,
“...it is the first time we have seen every part of the report come in weaker than expected for a very, very long time. Consequently, the market is fully discounting a 25bp September interest rate cut once again with a second one before the end of the year. Only 28bp of rate cuts were priced for 2024 as a whole just ahead of Wednesday's FOMC meeting.”
Some of the details of the report also suggested weakness overall. Private education and healthcare services contributed 95K of the 175K total. These are not sectors commonly associated with economic expansion such as manufacturing or technology. There were also downwards revisions to previous reports. Taken alongside the ISM employment survey, there is goring evidence the hot readings of Q1 have cooled off.
Dovish re-pricing created a logical response in most markets – stocks surged higher by over 1%, the US dollar dropped sharply and tested its 50dma, while yields eased.
More Cooling Ahead
It does seem Powell and the Fed knew some cooler data was coming. Perhaps the details of the PMIs and the trends in the data tipped them off. In any case, it looks like they were correct to stay dovish during this week’s FOMC meeting and there could be further cooling ahead.
Powell said, “there are a number of places in the economy where there are lag structures built into the inflation process,” and talked at length on the potential for a further decline in the large housing category. Rent growth is expected to catch down to the much lower leading indicators. This will give the Fed some confidence the Q1 inflation pick-up was just a bump in the road and not something more concerning.
As Goldman Sachs point out,
“Powell made it clear that he did not take much signal from the recent upticks in the inflation data and the employment cost index. Asked if he saw anything more worrying than bumpiness in the Q1 inflation data, he said “not really.” And when asked about wage growth, he emphasized the “pretty consistent progress...”
Should inflation cool off again and the labour market weaken, the Fed may well cut earlier than the expected September meeting. There are still two more Jobs Reports due ahead of the July meeting and if a trend develops, there may be much higher odds of a cut. This would weigh heavily on a US dollar which has been boosted significantly by more hawkish expectations.